Tariffs & Q2 Growth Shock | Trade Maven Brad Setser on Trump’s Tariff Warpath, China’s Balance of Payments, and “Self-Induced Recession” Probabilities
01:26:25 Share

The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door.

We've got an incredibly important conversation today. I'm so glad to be speaking to Brad Setzer, Senior Fellow at the Council on Foreign Relations. Brad has served as Senior Advisor to the United States Trade Representative and Deputy Assistant Secretary for International Economic Analysis at the U.S. Treasury. So we're going to be talking about all the big things that are going on in trade and tariffs. Brad, welcome to Monetary Matters. Happy

Happy to be invited. Brad, tariffs that have already been announced by the Trump administration, as well as the reciprocal tariffs scheduled for April 2nd, just give us a sense, how is that going to impact the economy, the US economy, the rest of the world? Well, frankly, it would really help to know what the reciprocal tariffs are actually going to be. If you're really going to do

a tariff in response to other countries' value added taxes and consumption taxes, plus some estimate of the non-tariff barriers, plus some added factor for currency undervaluation, you could actually get quite meaningful reciprocal tariffs.

I don't think it's yet clear how high that could be, but numbers for some countries of 20% are plausible. And if you layer that on with some of the tariffs that have already sort of been laid out, the expected sectoral tariffs and autos and pharmaceuticals, semiconductors,

Presumably, the reciprocal tariff on Canada would displace the IEPA fentanyl border tariff, which is set to go into effect on April 2nd at 25%. But none of this is entirely clear. So first point is that like a ton of uncertainty. Second point is actually if they go through with everything that could be done, actually quite large tariff.

If you do all the tariffs that were announced, including those that were deferred in early March, the 20% on China, 25% on Mexico and Canada carve out for oil and potash, you're kind of at a just pay it cost to the tariff of about a percent of GDP, which is, you know, way more than the China tariff in the first term, which is more like a third of a point of GDP. And that tariff was implemented in waves. It wasn't implemented at once.

It's bigger than the Nixon shock tariff, which was a 10% tariff on less than 5% of the economy because goods trade was smaller then. And then if you throw in the reciprocal tariffs, you could get just pay at cost, depending on what you estimate the action will end up being of 2% of GDP or so. That's big. Big enough to think that it might materially impact

the economic outlook, and also, frankly, big enough that a lot of people think it won't happen. 1% of GDP, even 2% of GDP, I mean, if my math is right, on the US GDP, that would be

$270 billion or 2% is over $500 billion. That is a lot. So Brad, the Federal Reserve had its estimate. Everyone's got their own estimates. They lowered their projections overall from 2.1% real growth for 2025 to 1.7% real growth of 2025. So that's

you know 0.4 percent you're saying could be as big as one percent maybe even two percent in terms of is that real gdp inflation adjusted and are you do you have a sense of whether it's inflation going up or of gdp going down or both look the numbers i gave are the just pay it costs they're not the impact on the economy and they don't factor in retaliation and what that means for u.s exports in general estimates of the inflationary impact

are close to estimates of the just pay it costs. That may or may not be correct, but that's where most estimates tend to converge. That's partially because some of the tariff may be absorbed and not passed on to consumer prices. But it's also a reflection of the fact that if the price of imported autos goes up,

Some firms may increase the price of domestically made autos. And so even if a domestic made auto only has one third imported content, its price may go up commensurate with a Mexican or Canadian made car. So you balance those two things out. And in general, you get estimates that are close to just pay it costs for the increase in the price level. For the impact on the economy, most estimates are a fraction, maybe a half, maybe a third of

Bigger in the short run than in the long run. It depends a bit on whether you offset it with tax cuts, whether it's a negative fiscal impulse. But you kind of maybe say like a half in general of the just pay it costs would be kind of a reasonable estimate of the short run impact on the economy.

but if you throw in a bit of uncertainty and lack of clarity and sort of general reduction in confidence and a lack of conviction on one hand if the tariffs are going to last for a long time if you knew that they were going to last for a long time maybe you would go ahead with some investments in the us but if you think they're going to be negotiated away or not stick you will hesitate and then the same is true

More generally, I think the Fed's estimates are modest compared to what I would expect if the full package goes through, if the full possible set of tariffs goes through. But no one knows literally how they're going to balance everything out, what's going to be done, what's just a threat. The messaging from the White House is that this is big and serious, but we've also had some

some past history of delay. So to be determined. But if they go forward with all reciprocal tariffs, with a high number for the reciprocal tariffs, with sectoral tariffs, if trade with U.S. neighbors like Mexico and Canada is severely tariffed, if autos are severely tariffed,

If electronics and pharmaceuticals are either severely tariffed or there's an imminent possibility of tariffs there, then I think you're in that range. I think you're risking a recession, actually. Risking a recession. So you think that the 1.7% real GDP number from the Federal Reserve for this year could be on the little on the optimistic side, you said moderate, so it could be worse. And 1.7%, not a

recession but is below trend growth I believe and you think it could be even even worse uh look I mean there's there's a there's a Q4 versus Q4 angle and then there's a dip in Q2 angle

I'm more confident of the dip in Q2 than where we are in at the end of the year, because then you might have some positives from tax cuts, some stimulus. I think it's much harder to say. But right now, if tariffs go forward on April 2nd, they will go forward ahead of any adjustments in tax. So they are a direct indicator.

hit to the economy in the second quarter, and a hit that is big enough that you could imagine the U.S. economy coming close to a stall in Q2 when you add in the uncertainty effects. And I don't think the Fed, in its baseline, assumed the biggest possible tariff implementation. So I think there's a lot of uncertainty, as I said. I wouldn't

say my baseline here is fundamentally different from the fed's baseline I think we probably have different estimates or a forecast of the trade action

And how are you assessing flat 10% tariffs on China, for example, versus reciprocal tariffs? I mean, are there truly going to be reciprocal tariffs on the rest of the world where, okay, what India tariffs us, we're going to tariff them. What EU tariffs us, the US, we're going to tariff them. Just how complicated is that? As well as you, I didn't even think about this, non-tariff measures say, oh, actually China, you're kind of cheating with your

Non-tariff measures, you're cheating with your currency. Europe, you're cheating with your value-added tax. I don't necessarily think I would use those words, but the president probably would use those words. How high are those tariffs going to be? Look, particularly if you're including value-added taxes, tariffs of 20% on many partners are quite plausible.

They won't actually be reciprocal tariffs because a reciprocal tariff, as most people understood it, would be that your tariff and my tariff are the same on the same product. We're not bringing our tariff on Japanese autos down to zero, but the Japanese tariff is zero. Now you can say there's some non-tariff barriers. I think the Japanese would say

large SUVs that use a lot of gas are not well suited to the Japanese market where gasoline is taxed very heavily and where the roads are smaller and they're designed for smaller cars. So you're going to get debates like that, but A, it's just not going to be reciprocal.

We're not going to bring our tariffs down to zero across the board. And we are, I mean, because most industrial tariffs within the advanced economies are, those most goods are tariffed at zero. We probably won't limit our increase in tariffs on European autos to their 10%. If we're going to do a reciprocal tariff that includes the Europe's VAT, we're going to be way above their tariffs.

And so I think that's one issue is that because of the breadth of the proposed action, it's going to be way beyond matching other countries' tariffs. And then on top of that,

You know, the value added tax can be, you can estimate what, you can look up what other countries value added taxes are. Quantifying all the possible non-tariff barriers, quantifying currency undervaluation, that allows even more flexibility.

So that's where you can get a maximalist view where this is more like a 20% across the board tariff, not a 10% across the board tariff, but with a lot more administrative complexity because you're going to do a different, even if you have, you kind of do reciprocal on a country. You say, we're going to evaluate all your trade policies taken together. We're not going to do it on each individual good.

still you're going to have different tariffs for autos from different countries. Whereas right now, basically for an auto, not a truck, light truck, the tariffs 2.5, unless you're a free trade agreement partner. So we're going to have the administrative complexity of different tariffs for different countries. A lot of complexities around rules of origin and the like that will have to be worked out. So it's going to be a quite significant shift in how

tariffs are administered, which will create complexity because it's being introduced very rapidly, if that's actually what happens. And it's potentially way bigger. It's certainly more complex and it is potentially bigger than a 10% across the board tariff.

Can you talk about the timing? You seem to say that the negative impact from tariffs on real growth and inflation, it sounds like you said will be in Q2 or very, very quickly, whereas the benefits or the perceived benefits by the Trump administration of reshoring

American production and NVIDIA investing money back in the United States, Apple investing money in the back of the States. Is it correct to say that that is a much longer term solution and those benefits or perceived benefits, they're not going to come in Q2 2025, whereas the pain is going to come quite quickly? First of all, I don't accept the headline numbers, the inflated, made up, frankly, I would use stronger language, numbers that have been announced. I mean, Apple is taking credit for

for making orders for TSMC's future chip production in the US. They were doing that under Biden. This is not real investment. And like the TSMC example is a good one. First of all, it was probably going to happen already.

But Apple was going to buy some chips made from TSMC Arizona, rather from TSMC Taiwan, because of their concerns about the long run implications of being dependent on Taiwan and the insecurity that that creates for Apple. Until that chip facility is up and running and producing at high levels,

You would have no positive impact on the I mean, you get the impact from the building of the factory, which is in this case already happened. And then you get the benefit from running the factory. But you there's a lag, you know, for the new whatever changes come with the new tariffs. If there's a lag before you people commit to a new factory and then there's a lag before that factory's up and running.

So in the short run, most of the effects of the tariffs is just going to be negative. There isn't a lot of spare capacity in most of the sectors that are going to be tariffed that will just automatically be switched on. So it'll be a lag before you get the positive benefits. And also a lot of those positive benefits, A, they depend a little bit on what the dollar does. The dollar can offset the incentive to invest in the US. And they depend a lot on whether you expect this to be a permanent shift

or whether you expect the short run negatives will lead to a reduction in the tariffs going forward, or you expect the legal challenges, which are likely to come if you use the International Emergency Economics Powers Act to be successful. So I think in the short run, you're looking at mostly pain. The gain comes if longer. And the other element of pain is other countries' retaliation, which will have an immediate impact. So I do think there's a timing issue.

So if the US puts tariffs on other countries, that will likely increase inflation for the US. So that's negative. But what if then Canada slaps a tariff on the United States and the other countries slap them on the United States retaliatory? What are those possible effects? Look-

It's actually modestly disinflationary. Think of what the domestic price of bourbon. If Canada stops buying bourbon, there's going to be more bourbon and they're going to like maybe lower price to move volume. But it's kind of up to the bourbon guys whether they want to adjust prices or not. But in general, if other countries retaliate, you know, when China retaliated against U.S. soybeans, the price of U.S. soybeans fell. They started to trade at a discount in relative to the global price of beans.

That was negative for farm income. It was positive for all the, for, for chicken farmers, for, for, for hog producers, everybody who uses and for tofu producers and all the various other parts of the ag industrial complex that use soybeans as an input.

So, I mean, the retaliation lowers output in the U.S., and it also, at the margin, reduces price pressure. And then, Brad, I love when people talk about the U.S. fiscal deficit. And, you know, for example, people say, is the U.S. fiscal deficit and the growing U.S. debt, is that sustainable? What if I were to ask you the question about the U.S. trade deficit, a U.S. current account deficit? We import way more than we export. Right.

I believe that's when it comes to goods. When it comes to services, we have, I believe, a minor surplus. But overall, if you combine those, it's still extremely negative. And China's is extremely positive. If I were to ask you the same question that Jay Powell got asked about the fiscal deficit, is it sustainable? Brad, is the trade deficit sustainable? Is this global trade the way where our trade deficit just gets bigger and bigger and bigger? Is that sustainable? In my view, no.

I think we're currently, you know, the latest data on the current accounts out.

We're at a deficit, including services, of about 4% of GDP. Our net external debt, if you exclude the equity component, so it's just focusing on the debt, and the equity fluctuates up and down. Right now, we have a net international investment position that's really quite negative, 70-80% of GDP, because U.S. equities are quite high.

highly valued relative to global equities. But just looking at the debt, the stuff that doesn't depend on, doesn't go up and down as much, our net external debt's about 50% of GDP. If interest rates stay around four, the interest burden on our debt's gonna go up over time. So that alone in some sense makes it less sustainable.

And then at current levels of the dollar, my assessment is that the trade deficit is not stable. The goods and services component will continue to deteriorate. So I think we're at four, a little over four, but we're on a trajectory that will take us closer to five. You know, can you finance a 5% of GDP current account deficit if you're the United States? You probably can.

But your interest payments are going to be trending up over time. That's one element of unsustainability. And your net external debt is likely to trend up over time because 5% is likely a bit higher than the nominal growth path of the US economy. So you're going to be trending up. We've been after the global financial crisis, we had a high level of net external debt, but it was a stable level of net external debt.

I think right now we're on a trajectory where we're no longer going to be in a stable path. So in that sense, unsustainable. But there's a lot of ambiguity around the word unsustainable. Unsustainable doesn't mean unfinanceable. Unsustainable doesn't necessarily mean you can't go up. The narrow definition of unsustainable is you're on a trajectory that doesn't meet long run equilibrium conditions.

You could stabilize your external debt to GDP at 60 rather than 50, at 70 rather than 50. You're going to have a higher external interest payment. And so the amount of trade adjustment goes up over time. But all those are technically doable. The other component of all this is that the share of global –

wealth, the amount of money that the world has lent to the US keeps going up. And since the US has been growing fast in the world, even if our debt, external debt to GDP is stable, the world's exposure to the US is going up. And at some point, that concentration could become a concern. So my view, which isn't necessarily fully consensus,

is that the trade deficit and the net international investment position are not sustainable over time at the current level of the trade deficit. And those two facts are related. The fact that the US has a massive trade deficit and it has a massive financial surplus, like the rest of the world recycles those extra dollars back into the US capital markets. Has that continued to go up? Has the rest of the world

continue to invest in the United States? Because if they stop investing in the United States and instead buy gold and other foreign currencies instead of dollar denominated assets, that might be an issue. And I know with regards to China, you've done some great work. We can flash some charts up as you talk about. The answer is kind of no, that China, dollar denominated assets reserved peaked or maybe the growth rate peaked in somewhere 2012 or 2014, somewhere around there. But what about the rest of the world?

you know the rest of the world has continued to buy u.s bonds i mean we we see that in the data a little fall off in the data for q4

But overall, the foreign bid for U.S. bonds has been substantial. It's largely coming from private investors now, not from official investors. So that's a shift relative to 10 years ago. It has driven, I mean, there's this sort of myth that it's driven by the dollar's role as a reserve currency. That was true 20 years ago when reserve growth was massive and rapid. Right now it's driven by the fact that U.S. was offering a rate pickup relative to Japan and Europe. Nothing complicated about it.

Straightforward yield differential. But yeah, demand has continued. You can argue that the trade deficit is a function of that demand. It's not that we run a trade deficit and it gets recycled back to us automatically. People wanted to hold dollars because the dollar offered yield. People wanted to buy U.S. equities because U.S. equities were going up.

And there was a perception that U.S. companies were going to capture future global profits. That led to an inflow that bid up the dollar and the dollar got bid up and exports tanked. I mean, exports are 2% of GDP, exports of manufacturers and ags, setting aside the energy, which has a sort of different dynamic.

two percentage points of GDP below where they were in 2014 or 2015. You know, arguably, that's a function of the fact that the US has had higher interest rates than most of the global economy for most of that period. And now the US has higher interest rates than China. So you know, you're not seeing the official recycling of

through reserves. That happened when the US was not perceived to be a great destination for private capital and other countries were growing faster when US rates were a little lower relative to global rates. Past 10 years, it's been straightforward. People want the yield that you can get in dollars. And but what about if we go back to a world where US rates are near zero and the rest of the world has higher rates? Do you think that the reserve currency reason for buying assets is back in play or that it's permanently not there?

look i mean it's to me my mind is a known unknown we don't know right most countries that have big surpluses don't need more reserves for prudential reasons so they'd be doing that because they don't want their currency to go up they just they want to preserve their trade advantage so would japan come back and intervene at yen 120 at yen 100 at yen 80. probably at yen 80. would it do it at 120 well they didn't always in the past they do it at 100 don't know

Would the U.S. view that as currency manipulation in a way that it didn't in the past? Don't know. Are the Chinese? The Chinese have moved towards recycling when they want to intervene. They don't do it through the central bank's balance sheet. They tend to do it, in my view, through the state banks.

The Chinese didn't hesitate to build up their foreign assets in 2020 and 21 when US rates were low. Would they do that again? Probably. Would the US react and call that manipulation, challenge it? Well, Trump says he will. I think we genuinely don't know. What I think is generally true

is that the big economies around the world with big current account surpluses don't have any further need for reserves for prudential reasons. There's some smaller countries, you know, Argentina needs some more reserves, Ecuador needs more reserves, but they're not going to drive a big inflow into the US. China doesn't need more reserves. I mean, we can debate it. I mean, unless you think you're going to hold reserves against the domestic money base. But

relative to its external fundamentals, China doesn't need more reserves. Japan doesn't really need more reserves. Korea certainly doesn't need more reserves. Taiwan doesn't need more reserves. The Saudis don't need more reserves. They might have to cut back on their fiscal and they're building Sydney's in the desert.

So where would the reserve accumulation come from if those countries choose not to? And if they do choose to go back to buying tons of dollars and recycling, would the US accept it or would the US view that as manipulation? Don't know. And when surplus countries, you say they don't have to put them into reserves, I think you mean into dollar reserves, but they are assets, they are there. So what are they putting, for example, has China put

its surpluses into, if not dollars? And correct me if I'm wrong, what I said earlier about how a little over 10 years ago, China's dollar assets peaked. What has it been putting it into? Is it putting into other sovereign bonds or putting into gold? What's going on? I mean, a little bit has definitely flowed into gold. Modest relative to the accumulated surplus that China's run over this time. But yeah, surely China's bidding up gold. Not

It's not like they put all their asset accumulation in gold. It's more like maybe a couple hundred billion, which isn't actually that much, but that's part of it. The bulk of it on a 10 year basis,

has gone through the state banking system. So, you know, there's two parts, I think, of the state banking system, so-called state commercial banks, Bank of China, ICBC. They take in deposits, they make out loans, they run big international operations. They now have dollar assets of $1.2, $1.3 trillion, which is kind of big. And those are funded domestically. They're not raising money abroad to lend abroad.

And that's invested in a range of things. Some of it is in corporate bonds. Some of it is in long-term loans. Some of this is in short-term loans. Some of it is probably in being lent through the cross currency swap market to Japanese institutional investors. Then you have the policy banks, China Development Bank, China XM that financed the Belt and Road, you know, at least several hundred billion, maybe close to a trillion went there. So way more than went into gold over this time period.

And then the third broad use of China's current account surplus has been particularly when the yuan has been depreciating, particularly when U.S. rates have been above Chinese rates. Some Chinese companies just accumulate dollars abroad, put dollars in offshore bank deposits, and that circulates through the global economy. It doesn't show up as a direct Chinese finance in the U.S.,

The only direct financing that we tend to see is the financing that comes from the accumulation of foreign reserves. But you can kind of infer a flow.

And so all these are bigger factors, in my view, than the flow into gold. Gold is supply constrained in the short run. So you tend to see a big move in price. These other things, you know, you can expand elastically your dollar lending. You can buy more dollar bonds through the state bank's balance sheet. You know, Bank of China will make loans for Manhattan real estate. You can do a bunch of different things.

As AI demand surges, nuclear energy is making headlines, driving tech's biggest companies to turn to nuclear power to meet growing energy needs. The VanEck Uranium and Nuclear ETF, ticker NLR, has provided investors with comprehensive exposure across the nuclear energy value chain for over 15 years, from downstream utilities to upstream uranium miners and innovative companies developing next-generation reacts.

And when you look at the Chinese balance of payments

flows. I know that you've done some really interesting work on China's current account deficit kind of is reported to be smaller than maybe you think it is, how the trade deficit is about a trillion dollars, but the current account balance is maybe $200 billion. And you think that there's something a little bit funny going on with the accounting. So what are the actual numbers and why do you think China might be, you know,

misreporting or changing some definitions in order to have a lower trade surplus, current surplus. China's customs goods surplus was about a trillion dollars last year. They've had a pretty good Q1 on the trade account, so it's going to be above a trillion when you throw in Q1. Services, China does import services. A lot of Chinese vacationers go to Japan, go to Southeast Asia. That's an outflow of a little over $200 billion.

In the past, a good estimate of the current account surplus was the customs goods surplus net of the tourism outflow. And that would put the current account at 750 to 800 billion. Now, I can argue that because China has a positive net international investment position of over 3 trillion, that you should have positive international investment income. But China actually reports a really big and quite puzzling deficit.

in investment income. That's puzzling because on one hand,

Companies that used to earn a lot of money in China, like GM and VW, aren't earning money in China. And on the other hand, a Chinese state bank lending at U.S. short-term rates should be collecting and financing that domestically. So they're not paying short-term rates on an external liability, should be making a lot more money than they did five years ago. China's reserve managers, you know, they still have over $3 trillion in reserves. The average interest income should have been going up.

And that's what you see with Japan, that's what you see with Germany, that's what you see with Korea, that's what you see with Taiwan. So it's sort of a surprise that China's investment income, as reported, has gotten worse, not gotten better. As China's economy has gone down, foreign earnings in China you would think would have gone down. Although a lot of the foreign earnings in China are like round tripping Chinese money through Hong Kong, so it's a little weird.

And then you really would think that China's interest income should have gone up. But that's not what you see in the data. In any case, my baseline estimate doesn't assume a positive surplus on investment income, which you could argue there should be there, just doesn't assume a big deficit. So you get a current account of, my view, 750, 800. What China now reports is about 400 billion, 420. Now, it was 200, even lower than

at the end of the second quarter. So your number is right and you've accurately reflected the number I reported when I first did the work. It's just there was sort of an evolution

in Q3 and Q4. But it is still roughly a half of what I think it should be. It used to be maybe a third of what I think it should be. So it's way below what I think it should be. And what I think it should be actually just mirrors essentially what it would have been or what it was when China's current account surplus, you know,

before 21, we'll get to the importance of 21, really was typically very close to the customs goods plus the services imports.

So what has happened? Well, first of all, you have this sort of bizarre negative and increasingly negative investment income account when China is a net creditor to the world and when global rates are going up and when Chinese rates are going down. It doesn't make any sense. No good explanation for that. No one, I mean, IMF I think is only now starting to look at it, but I've not met anyone who can credibly

credibly explain how China's investment income account has gotten so much worse relative to 2018. And then the second thing that China has done, and this is discussed in the IMF's latest staff report,

And, you know, it was phased in in calendar 21 and fully impacts the data in calendar 2022 is trying to change the methodology it uses to account to to count the good surplus in the balance of payments. So you would think, well, OK, you know, the balance of payments, good surplus would be the custom surplus minus,

the normal adjustments for insurance and for freight which gets shifted over to the services balance and that's exactly what it was before 21 or 22. you could take you know basically customs imports multiply it times 95 and you would get balance of payments imports

you would do customs exports times 97 or 98% and get balance of payments exports. So it was a clear correlation. And China said, hey, that's actually what we do. We just have a standard adjustment factor for insurance and freight. After 2022, China changed the methodology and it now no longer uses customs data as the basis for its goods balance of payments data. It's using internal payments data. And the argument was that

The balance of payments is based on transfer of value, and the best measure of transfer of value is payments. The further argument was that for certain goods made by contract manufacturers and previously contract manufacturers in free trade zones, but they've sort of dropped that now, but contract manufacturers in China, the reported customs export price

was the global wholesale price, not what the company was being paid. So where does that matter for mobile phones, for iPhones? So the argument was that in the customs data, you would see the global wholesale price for iPhones and what the contract manufacturers, Honhai and the others, were getting was their actual cost of production. Now, I've looked at that.

And what you see in the customs data is an export price for smartphones to the big advanced economy markets where Apple dominates the data between 400 and 450 billion.

dollars a phone, not at odds with most estimates of the underlying cost of production and well below the global wholesale price. So my first observation is that if China's argument is true, they should be able to show the data. They should be able to show where there's a gap between customs and payments and show us the sectors. And in the sector that was highlighted

The customs data doesn't appear to be significantly inflated. It appears to basically be the payments data. And if it's not phones, where is it? There isn't another sector dominated by contract manufacturing where there's a huge gap between cost of production and global wholesale prices. Then there's an adjustment, and this is fair.

for Apple's onshore sales. So in the past, the onshore sales, which are the production still in China, that would show up either as a royalty payment to Apple Ireland or as a profit from China that goes to Ireland, a dividend. So it should appear in the balance of payments, but not in the goods balance. China said, well, let's do this on a different basis.

Let's treat a contract manufacturer in a free trade area as offshore. And when it's sort of onshore offshore, when it sells to when it produces a good, it is producing a good that is transferred in value to Apple's Irish subsidiary. We're going to count that as an export and then it's going to be re imported at a higher price at the actual retail price. Fair enough.

That's how Ireland accounts for Apple Ireland. It moves the profit from the income line to the customs line, and it should reduce the surplus. Fully agree, but there should be an adjustment to the income line or to the services line. And what China hasn't shown is they're actually doing those other adjustments.

What we know is that when China introduced this change in its balance of payments methodology, the current account surplus systematically starts to deviate and deviate down from customs goods and services. And what we also know is that when China introduced this change, errors and omissions, which are usually viewed as a proxy for hot money outflows, also went to zero.

So what I think happened is they got safeguard instructions to get rid of errors. And the easiest way to get rid of errors is to basically reduce the current account surplus to the financial outflows that you can measure. So that's my thesis. It may have also inadvertently reduced or perhaps this is also a secondary goal, reduce a bit of the international pressure. But I think right now,

Europe is not taking comfort in the fact that China's current account surplus is a little over 2% of China's GDP. They are worried about the rise in China's goods surplus. And I think most countries around the world are focused on the goods balance. So I don't think it's worked. But statistically, even if you're back up to 400, 400 versus 800 is a meaningful gap, 2% of China's GDP.

And what does China do that enables it to export so much more than it imports? I think maybe China has some nominal tariffs, but what are the non-tariff measures China uses to be so competitive on world markets, what our president would call cheating at trade? And if it's so effective, why can't we do some of that? Look, the biggest thing China does is that China saves a ton and it doesn't consume much.

so as a result if consumption is low you're not going to import much so like this is yeah we could do that we could become a high savings low consumption economy and our trade balance would change so that's the fundamental reason for the surplus is that china is a very high savings low consumption economy

Consumption, absolutely, yes, has gone up over time because China's economy has gone up over time. But consumption as a share of the economy is very low on a cross-country basis. Savings as a share of the economy is still above 40%. On top of that, China does a bunch of things that lower imports and also in equilibrium, one would say if you didn't have this savings surplus, it would also lower exports.

Because, you know, if you don't import, you don't export. If countries can't get your current, you know, there's a learner symmetry condition. But that doesn't apply perfectly when you have this big savings surplus. But China's imports as a share of GDP, if you exclude commodities where China has to import, are very low. And they're even lower when you net out the imports that are tied to re-exports.

So right now, the imports of manufacturers for China's own use are like 4% of GDP. Very low, in all honesty. Exports are 14% after you net out the imported parts. Manufacturing surplus of 10. Gone up, actually, since the Trump tariffs in 2018, 2019. Gone up since COVID.

So structurally, what does China do to do this? First of all, China does have tariffs. I mean, China has a meaningful tariff on autos. Used to be 25. That's why everyone had to form a JV. Now it's gone down to 15. It only went down to 15 when the Chinese market was already oversupplied. So no one was going to actually sell a lot into China. So China has tariffs. China does a lot of buy China preferences. So, you know, for China's EV subsidies, you had to qualify on a list.

No import ever made it onto that list. No domestically made car with an imported battery ever made it on that list. And when the list was first started, the Korean companies making batteries in China

Those Korean-made in China, Korean-owned companies making batteries in China, those batteries couldn't be qualified for the list, which hurt Hyundai and hurt GM because they use the Korean battery. And only Chinese-made batteries from a Chinese firm with a car that was made in China qualified for China's EV subsidies. These buy China preferences are pervasive throughout the Chinese economy. And even when there isn't formal buy China,

you know guess who buys telecommunications equipment in china well the big three state-owned telecommons company they can prefer huawei and zte over ericsson they don't have to you don't have to make it formal you just tell the companies they're state-owned their management's appointed by the communist party

who do you sell airlines to in china airplanes to in china the three big state-owned airlines so there's the the the state owner you know who do you sell high-speed rail engines and parts to in china the chinese state rail company so you know there's pervasive by china preferences local preferences and then on top of that china subsidizes domestic production directly with

grants and the like, and equity participation in a lot of companies, and indirectly through cheap financing from the state banks. So China has a very strong capacity. Once demand for a manufactured good emerges in China, Chinese production expands to meet that, and then some. So there's a lot of active industrial policies. Now, we could replicate a lot of that.

If we replicate a lot of that and we have a big fiscal deficit, a low high, high consumption, low savings economy in equilibrium, we're going to have fewer imports, but also fewer exports. That's just the nature of the things. But absolutely, we could have a more restrictive border with a lot.

more domestic intervention to favor finance that supports manufacturing and have an economy that looks more like China if we really wanted to. It's a hell of an adjustment. And maybe it was President Biden's Inflation Reduction Act. Some of that was in that vein, just not as extreme as what China does.

Sure. I mean, so the CHIPS Act is sort of in that vein, although it's also reflecting the subsidies that Taiwan and Korea, Singapore too, through the tax code, you know, most semiconductor production over the past 20 years was benefited from some subsidy or tax code.

favorable treatment. The U.S. wasn't playing that game. So with the CHIPS Act, we both did the subsidies, direct subsidies, and gave favorable tax treatment to investment to kind of catch up. China was doing the same thing on bigger scale in chips because they're also behind in chips, being behind the frontier. They wanted to catch up with Intel and with Micron, but also with TSMC and Samsung and Hynix.

Then on the Inflation Reduction Act, it's different subsets of the economy focusing on the clean and green technology components. But yeah, it's very explicitly designed to give some preference to U.S. production in an effort to build up our clean industrial base and to make sure that all of that demand is not met by Chinese production.

Obviously, President Trump isn't keen on clean and green, so those subsidies may go away. He doesn't seem to be keen on chips either. He thinks you can replace them with tariffs. I think he's wrong there, frankly. I think that would be a huge mistake, as I do think that the argument around chips is a national security argument, and it's not just a green, clean, urban argument.

Brad, what is the connection between the extraordinarily high level of US corporate profits and the very negative trade account that the US has with the rest of the world? So Nvidia designs chips, they're made a lot of them by TSMC in Taiwan. Apple designs phones, they're made a lot of them in China. And then the profits eventually go back to the United States. Is there a connection between why American corporate profits are so high and then the

just the current accounts that is so negative? I mean, corporate profits do show up in GDP. Corporate profits that are offshore don't. But corporate, a portion of Apple's profit does show up in U.S. output. Look, the fact that corporate, big multinational U.S. companies are very profitable tends to mean that they're, you know, they've got a nice margin. They're collecting money from consumers.

And rather than spending that on investment, in which case they would have lower current profits, maybe higher future profits, they're running large surpluses and they're either buying back their stock or distributing that as dividends. And that distribution changes, you know, it moves income to higher saving cohorts of the U.S. economy. And so there is an impact because the low the

The lower income cohorts, they are paying Apple for a fancy phone and they aren't getting jobs from Apple. So it's not being recycled in that way. And so they can sustain their consumption either with a low savings rate or with borrowing. And then the high income cohorts see the price of their stock portfolio going up and then they spend.

and that supports high spending throughout the economy.

What you also see, and this really is a function of the tax structure of any individual company, is that some of these large multinational companies book the bulk of their global profit abroad. And that doesn't count in U.S. GDP. Apple's global sales support Ireland's GDP. And once the profit is booked in Ireland, the money is still available to buy stock, pay dividends, buy stocks, do buybacks.

But it shows up in Ireland's GDP and it shows up as a very, very large profit in Ireland. And it's in Apple's 10K. They earn more offshore and mostly in Ireland than they earn in the U.S. They do so because Apple Ireland pays 60% of Apple's R&D budget and gets the rights to profit from Apple's sales outside North and South America.

NVIDIA has actually changed its tax structure now happily. So it's intellectual property, which used to be offshores now onshore, and it shows up at a low, it is taxed at a low rate because it is technically an export just because, and then it contracts with TSMC to do all the heavy capex. So NVIDIA generates enormous profits without employing a lot of Americans because all the production is done in Taiwan.

So that's another model. The pharma companies shift profit out of the US to Ireland and Singapore and other low tax jurisdictions by moving their intellectual property abroad, producing abroad, and then they claim the profit on their US sales as a foreign profit. And so they register the profit registers, not in US GDP, but in Irish GDP.

And the production also registers in Irish GDP. And the jobs associated with production are in Ireland's GDP. There's an extraordinary increase in U.S. imports from Ireland literally over the past year, which seems linked to Eli Lilly making its weight loss drug in Ireland. While Novo Nordisk, ironically, the Danish company, is making its drugs in the U.S. So you do have some important distortions there.

upward redistribution because American companies make very profitable products without necessarily employing a lot of manual labor in the US. They do employ engineers, they employ designers, but they often impact the US economy partially through these high wage jobs, but also heavily through the profits and the capital gains that these companies generate. So Apple's corporate profits do go into GDP if it's booked in America, but not if it's booked in Ireland.

Brad, on that theme of GDP sometimes being slightly misleading to reality, I know that net exports goes into GDP, so exports minus imports. And so the more the US imports, actually, the lower GDP is. And that's why GDP expectations from the Atlanta Federal Reserve tanked because the US imported so many things, maybe front-running tariffs, but also in particularly gold from Switzerland and the United Kingdom.

So just in terms of if President Trump puts on tariffs and there are basically no or very little retaliations and U.S. imports go down or U.S. net exports go up, is there actually a chance that GDP could be looking quite nice, quite strong? In that scenario, no, because domestic demand will come down. So remember, imports are deducted from GDP.

because they reflect domestic demand that is going to someone else's production. If domestic demand comes down and imports come down, that doesn't help GDP. And in this case, domestic demand will be coming down. Imports will go down because Americans aren't buying. And if Americans continue to buy imported goods and that generates tax revenue,

That tax revenue, the higher payments to the government, is a reduction in spending power for American consumers, so they'll have less money to spend on U.S. goods, on going out to eat, on everything else. So that will lead to another reduction in demand. You have to realize that imports enter into the equation.

through because typically because of the correlation with demand. Now, there are cases and this is where I disagree with some economists who say that you can't grow the economy by reducing the trade deficit, but you can obviously grow the economy by growing exports. That's an increase in demand for your goods coming from the rest of the world, at least higher output at home or exports.

but if you think about oil where u.s domestic production rose relative to u.s demand that registers as an increase in gdp because we're producing a higher fraction of our own demand but that's in that case demand wasn't coming down demand was constant and u.s production was going up and that displaced imports i think the concern here is that u.s import demand will be going down because

The US overall demand is going down because of tariffs and tax increase. It's a big net drain. And there's the offsetting increase in production probably requires certainty and requires time, and it won't happen immediately.

Brad, unlike a lot of pundits who go on TV, you are someone, you're a highly respected economist. You're not going to be making big calls, throwing things at the wall. But if I could just pin you down a little bit, I understand there's a lot of uncertainty, but could you just give us your best hunch of the different distribution of probabilities of how this plays out over the next few months on the spectrum of it's Smoot-Hawley 2.0, which exacerbated the Great Depression and there's an economic downturn

you know, minor catastrophe in the US and the rest of the world to on the total opposite side of the spectrum. Actually, President Trump, you know, as a negotiator, he's able to extract concessions from the rest of the world with regards to trade and tariffs actually come down. This is what Commerce Secretary Lutnick has hoped for on public appearances and interviews. On that spectrum of really bad to quite good, how are you judging the probabilities of, you know, if it's going to be the one on the left, the one on the right, or somewhere in the middle?

I rule out Smoot-Hawley 2.0 because we don't have a bank failure. We don't have the precursors to the depression. So this isn't going to be making a depression worse. It may be a self-induced recession, but that's not a depression. It's not going to trigger, in my view, a financial crisis. But your worst outcome is a self-induced recession and a meaningful stock market correction.

that's not a great outcome to be honest certainly not what i think trump promised in his campaign although if you listen to some of the recent rhetoric there's been a lot more emphasis on short-term pain for long-term gain which implies there may be some short-term pain which i would agree with i would also pretty much rule out the lutnick positive scenario we are not laying the the groundwork

For escalation to deescalate where we get significant liberalization. Why not? Well, what liberalization are we concretely demanding from Canada that would lead us to lower the tariff? As far as I know, nothing. Maybe we want a little, we would give rid of the 25% tariff for a little change in their dairy policy. That's disproportionate.

But there's an awful lot of rhetoric about how the 25% tariff on Canada is linked to the fact that Canada doesn't work as an independent country. It should really be the 51st state. That was literally what the president said on TV two days ago. We're defining value added taxes, which are non-discriminatory, which are not generally thought of as a trade barrier. Sure, they have an impact

on trade because other countries are taxing consumption and we aren't. They're raising more tax revenue than we do. They generally run smaller fiscal deficits than we do. Part of that's the VAT, but a VAT is neutral. Imports and domestic production face the same tax.

and a VAT is a big part of other countries' tax base, there is no way Europe can negotiate away its VAT and increase defense spending. So we're not laying the groundwork for a real negotiation. We may get some cosmetic concessions, nothing fundamental.

we're not making demands that would lead to those fundamental changes. And we're actually creating a political context, particularly vis-a-vis Canada, that makes it really hard for Canada to make concessions. It's also generally a bad idea to have a trade negotiations when other countries are going through a leadership election. So I don't see any near-term possibility we end up there, nor do I think President Trump

as opposed to some of his advisors, wants to escalate to deescalate. He talks about an external revenue service. He talks about other countries paying tax so we can lower domestic tax. Now, we pay the import tariffs, so it's a little wrong. But his rhetoric is not deescalate. His rhetoric is that we should have tariffs. We should go back to McKinley. We should have a less integrated economy. And that is not

globalization on better terms, that is less globalization.

So I think the range is more a self-induced recession, something that's like a modest slowdown with a shift in the composition of tax towards more tax on imports and lower taxes on everything else, but not much change in the fiscal balance. Two, I mean, on the upside, well-targeted tariffs that respond to China's real distortions

and help rebalance the global economic relationship with China. And yes, some short-term costs, but in the long run, we have a more balanced domestic economy. I don't think you're going to get either tail. And look, right now I lean towards the self. I mean, I have no idea what the administration is going to do on April 2nd. But if they do what they've suggested they may do, I'm actually leaning towards a self-induced recession.

And then depending on what happens after, if you do the tariffs and you pull away the CHIPS Act, I actually don't think you get a manufacturing renaissance in the US. So I'm not sure you get the long run gains with their full policy package.

And Brad, is there a recent example in history or do you have to go back hundreds of years for an example of in the U.S. tariffs going up causing recession? Because it's my understanding that tariffs have gone only one direction down since maybe the 1950s or 1960s. And they went up a little bit in 2018 and President Biden kept them higher. But really, the golden age of tariffs was from after the Civil War until now.

I think, early 1940s, 1950s. And that we just, we have the theoretical data, economists getting their PhDs, they have the charts about deadweight loss. But if you look at empirical examples, we really have to look back 100 years, which is problematic.

I mean, some truth to that. There have been, you know, there was the Nixon shock, the Nixon tariff. It didn't stay on that long. You know, the China tariffs were significant. You can look at that. Steel and aluminum, they're actually pretty significant sectoral tariffs. You can look at that.

So I would say we were on a general trajectory after World War II of declining tariffs. Big decline actually didn't come in the 60s with the Kennedy round, another in the Tokyo round in the 70s. By the time you have the Uruguay round, most tariffs for the U.S., not for developing countries, U.S., Europe are actually pretty low. Half of global industrial trade goes on at zero tariff, electronics zero, pharma zero.

So I think in general, we're on a trajectory of declining tariffs for a long time. You have some sectoral counterexamples. You have less liberalization in agriculture.

So you have a more restrictive regime there. So you have some examples of protection there. You have some sectoral examples. But in terms of big, broad, macro relevant tariffs, your best example is the China tariff. And as I said earlier, the China tariff in aggregate was like a 15 percentage point increase.

a change in the tariff some 25 some zero some seven and a half aggregate 15 on a little over 2 of us trade so you kind of get a an impact of 30 to 40 basis points of trade on a just pay it basis you can do distributions actually the biggest swing was a shift from consumers to government

The tax was the biggest component. Very small production increase, some loss of consumer welfare, some gains to third party producers. So, you know, that's your kind of your best example, but it was phased in over a two and a half year period. So the shock element was never more than, you know, 15 basis points of GDP in a quarter.

So I don't think we have a good example of a percentage point or two percentage points shocks in a quarter. And then the other big difference is, you know, while it was perceived at the time as a relatively aggressive action and it was perceived at the time as using Section 301, the unfair trade practices that lets the U.S. do unilateral actions as opposed to going to the WTO as an error.

a revival of an old trade measure. The actual process was very orderly. Bob Lighthizer went, put out, did an investigation, put out a report. The report told you the damages. The initial tariff proposal was proportionate to the damages.

Then China retaliated. The only thing that was a little unexpected and out of order was then that the president said, well, if you retaliate, we're going to go from 50 billion of tariffs to 250 billion of tariffs. But those 250 billion tariffs were put out for notice and comment. People knew what was happening. There was advance opportunities to prepare.

What we're doing now is not coming through such an orderly process. IEPA, the sanctions authority, doesn't require notice and comment, doesn't require an investigation. And frankly, that has meant that when the tariffs have been imposed, people have been totally confused. When they were imposed, rolled back, and then, oh, no, it's not a full rollback. It's just for USMCA-compliant trade. You know, it took a while for people to figure out what was USMCA-compliant and what wasn't.

And some stuff that wasn't USMCA compliant was USMCA non-compliant simply because people didn't follow the paperwork because the global tariff was zero. So why bother to get the USMCA zero? So, I mean, I think there is something to the notion that this is unprecedented in magnitude and unprecedented in the fact that it isn't going through regular order. And how much more intense in terms of scale –

Is the Trump 2.0 tariffs what we've had so far and what could be coming than Trump 1.0 in 2018? Because weren't there limits on it's up to $200 billion, $300 billion? Or was it unlimited before? Well, you had action on, say, tens of billions of steel and aluminum.

imports and then potentially on up to 500 billion, the entire imports from China. But there was no real threat on Vietnam, no real threat on Europe. Certainly not. USMCA was renegotiated and people thought that was safe. So 500 billion was less, you know, like on

under three percent of US GDP now Canada Mexico plus China you know that's like roughly imports of 1.5 trillion ish you know that you know we may do more on Europe we're going to do more on probably on Asia Japan so we're definitely way bigger

way, way, way bigger. As a share of GDP, it was 0.3 to 0.4 percentage points over two years on the tariff increase on China.

the threatened tariff increase to just pay a cost the simplest possible calculation which is imperfect but easily comparable over time is over two times that for the actions that was threaded in the beginning of beginning of march i can get four to five times that if you really go maximalist on april 2nd so much much bigger and if you compare it to the

the quarterly or the annual changes even bigger. Because, you know, say take is 40 bps from China and steel over two and a half years. You're never going more than 20 bps a year. And we could be close to 2% points, a factor of 10 on an annual. So way, way, way bigger, actually. I mean, I think people are there's a tendency to think, oh, tariffs, we did tariffs before. These are much, much bigger, much bigger shock.

And why is President Trump going so hard after Canada and Mexico? We talked about how China can be a little bit unfair on trade, and maybe it's necessary to do that. Maybe we can make an argument. But with regards to Canada and Mexico, is what President Trump, is there a basis to what he says that Canada is being very, very unfair on?

and that the US is getting screwed and the same goes for Mexico. And then also, why is President Trump tying tariffs to non-economic goals such as fentanyl and border?

and Canada's independence and maybe Denmark's refusal to sell Greenland. Look, Trump in the campaign, I think in other contexts, has said he, you know, he says he like loves tariffs, that it's one of the best words in the English dictionary. He likes tariffs and he said pretty explicitly he wants to use tariffs or often has suggested, though not in the policy platforms, that he wants to use tariffs instead of sanctions, that he likes tariffs, he doesn't like sanctions.

and that he wants to use them as a tool of foreign policy, and that he likes the fact that he can adjust them, that there's a lot of unilateral presidential authority around tariffs. And he takes a very expansive view, maybe too expansive, of what is allowed. But that's part of it, is he's found a tool, it's a tool he likes.

And as a tool that gives him personally a lot of leeway, he can put them on, he can take them off, he can adjust them. If he wants to negotiate, he can negotiate. If he doesn't want to negotiate and he wants to threaten, he can't. You know, the most charitable argument that can be made for the targeting

And to be clear, I don't think we should be targeting Canada and Mexico. And I don't think we should be targeting Europe in the fall either. Nor do I think we should be targeting Japan in the fall either. But the most charitable interpretation is that we do run trade deficits with Europe.

with Mexico and a small deficit with Canada. Now, the number of $200 billion is made up. There is no $200 billion. It's between $50 and $100 billion. With Canada or with all three combined? Sorry. With Canada. Mexico is bigger and it's getting bigger because of the auto deficits going. Mexico is going up. Deficit with Europe is going up because of pharma.

And frankly, on pharma, it's a byproduct of the 2017 Trump-Ryan Tax Cuts and Jobs Act, which incentivized offshore production. So, I mean, it's mostly a function not of bad things that Europe is doing. It's a function of flawed tax reform, in my view. But vis-a-vis Canada, we have a small deficit, 50, 70, you know, it kind of depends a bit on the price of oil. That deficit goes away if you take out oil.

So Canada is actually the biggest trading partner where the U.S. runs a surplus in manufacturers. We have a deficit with Mexico, to be clear. Canada and Mexico also did a Trump trade deal. The USMCA was renegotiated under Trump. So if you thought that a trade deal protected you, you would think Canada and Mexico would be protected. So Canada, you know,

is our best trading partner when it comes to exporting manufacturers a trade war with canada would be negative for the industrial parts of america de-industrialize the us so in those grounds it doesn't make any sense whatsoever now canada does have some protection in dairy and we have a long-standing dispute with canada over the fact that they they don't charge

timber companies, loggers, a price to log on a lot of their federal timberland. And most of our timberland is private and people, you know, so there's a delta there. For the record, Canada is not alone in protecting parts of its agricultural sector. Look at our sugar protection. We protect a lot of vegetables from competition with Mexico. We have historically not been fully open on agricultural trade.

nor are most countries. In general, the norm, agriculture is a negotiated liberalization. It's not complete liberalization. And in dairy, the USMCA let a certain amount of US dairy exports go into Canada tariff-free, and we haven't fully used the quota. So the notion that Canada is royally unfair to the US is, in my view, a complete myth. Canada is

is our most balanced major trading partner, the only major trading partner where we have a surplus in manufacturers. They actually sell us their oil at a discount because their pipelines don't let them go to the coast. So on those grounds, there's no real basis for making Canada enemy number one. And so, you know, you're kind of left with

And, you know, the fentanyl stuff is maybe it's real with Mexico. It's not real with Canada. So you're kind of left with this, you're left with the conclusion that Trump's doing this to make a point, to show that no one is safe. That'd be the one explanation. Or he actually really means...

his argument that Canada only exists as an independent nation because of the generosity of the United States. And if we take away that generosity, which comes to spending on defense so that we protect their northern border, in his view, and then not using our leverage on trade to the maximal extent,

We can, by changing that, we can convince Canada that it doesn't want to be an independent state. I don't think it's going to work. I think it's going to lead Canada to reorient its trade to China and the Europe. And I think at the end of the day, we actually need Canada if we want good radar coverage for missiles coming over the pole, and it would be a disaster to get rid of NORAD. But set that aside, it's hard to explain. I think with Europe, yeah, there are some protections.

There's a 10% auto tariff. Our zone is only 2.5. GM and Ford are making SUVs and pickups that aren't well suited for the European market. And so even if you brought that down to two and a half, you're not going to have a surge in U.S. exports to Europe, not at the current levels of the dollar. But hey, yeah, there's a difference. We could negotiate around that.

We have agricultural protection, they have agricultural protection. But the biggest swings in trade between the US and Europe have been in gas, which is a function of the cutoff of Russian gas and demand for US LNG. And then in pharma, where it's not the US, Europe being unfair, tariffs are zero in both ways. It's a distortion from the US tax code, which allows US companies to get a lower tax rate

if they produce in Europe and keep their intellectual property in Europe. You can't blame Europe for that. That's a function of our own mistakes. So I mean, I'm not convinced

that the Trump strategy is is fully rational. But he likes tariffs. He likes the leverage. He likes the drama of negotiation. And he has expanded the use of tariffs to cover non-economic goals. I think Bob Lighthizer, when Lighthizer was his first term U.S. trade representative, was actually a disciplining force that kept the tariffs focused on trade goals. And at least we may we collectively may may appreciate that more.

And who is the new Robert Lighthizer? Is that Jameson Greer? And what is his belief? Is he not as much of a moderating force? Look, the true replacement for Bob Lighthizer is Donald J. Trump. Donald Trump, I mean, my colleague Ted Alden has said that Trump's goal in his second term was to be his own trade representative. And in some...

Allow me to be a bit mean and a bit partisan. It seems like he's delegated running much of the government to Elon so he can be his own U.S. trade representative. That's what he likes. That's what he wants to do. He loves banishing the tariff threat. He loves the drama. And we'll see how far he's willing to go.

Jameson was Lighthizer's deputy. He has written extensively about the problems of trade with China. He's also been, it's been suggested in some recent press reporting that he's a little worried about the lack of regular trade order and the confusion that has generated.

But his biggest problem is that he doesn't have, you know, he's not a billionaire. He doesn't have the stature of the billionaires in the cabinet. And he hasn't yet, I think, developed the kind of rapport with Trump that Lighthizer built. And Lighthizer built that because in some sense, while he's moderate relative to what we're seeing now, he was the most willing of the moderates, you might say, to actually launch trade deals.

cases in Trump's first term. So he's willing to push back against Mnuchin and Gary Cohn when Gary Cohn was still there and argue for a more aggressive trade policy than a lot of Trump's other economic advisors. Now Trump self-selected so that the more moderate voices, they had to come out and say they were pro-tariffs in order to get their jobs. Greer has not emerged as a force of full moderation.

nor has he fully asserted control over trade policy, in my view. So there's two President Trumps that people have been speculating which President Trump is going to be ruling the day. The President Trump who wants to do deals and negotiate lower tariffs, and the President who views tariffs not as a means to an end, but a good end in and of itself, and he wants to be President McKinley. It sounds like, Brad, you think President Trump is definitely of the latter category, and that he is Mr. Tariff Man. I take him at his word.

Look, what I think is, and this is generalizing based on the China example from his first term, but with the China example, he was tariff man. Tariffs went up. They went up substantially.

Went from on average 3% to on average 18% relative to pre-tariff trade. It's down now because the tariff stuff is less prevalent, but meaningful change in tariffs vis-a-vis China. He was also deal-making Trump. It could have gone up even more. He did a bunch of dramatic deals. Some of those deals were opening Chinese markets up. There was a real opening in beef, some modest opening in pork.

They reopened their market for chicken feet, chicken paws, which matters to Arkansas. Modest but real openings. And then he negotiated non-traditionally. He didn't want just market openings. He said, hey, China, why don't you buy more of our stuff? And since you have a lot of state companies, you can just buy stuff. And okay, they got commitments to buy that they didn't deliver. Trump is quite willing to get non-market investments and non-market purchases. He's not a liberalizer in my view at heart.

But he thinks, I think, or at least I think he thinks, that you can both raise tariffs and still do deals, with the deals being deals to keep the tariffs from going up even further. Now, the risk on that is there's continuous uncertainty, and that uncertainty –

dominates any of the positive effects of the deals that he does, and that the tax increase from the tariffs that he does, the McKinley side, is quite meaningful. And they have an incidence on low-income consumers that weakens our economy. Plus, there's the retaliation because other countries, they may do some deals, but some countries are just going to retaliate because they don't like being pressured.

So Brad, some people might be viewing this and saying, okay, at the beginning or towards the beginning, Brad said that he thought that the US trade balance was unsustainable. And President Trump is, maybe in a dramatic way, maybe in a way that Brad doesn't agree with, trying to fight that, trying to lower that. So what would you do? How would you attempt to moderate the terms of trade and maybe lower the US current account balances, the US trade balance

Without going full Trump, and presumably it should be said that most or nearly all of what President Trump is doing, it sounds like you disagree, you think is a bad idea. Look, I did not oppose every aspect of his first term trade policy. I certainly supported much of the action that was taken against China. I criticized some aspects of it. I criticized some of the purchases deal. I thought it was too narrowly focused on intellectual property and it didn't focus enough on industrial policy.

But in general, I supported a toughening of trade policy towards China, and I still do. I do not support a trade war with Canada. So therefore, yeah, we break.

I also don't think we, I don't support a full trade war, full tariffs on Europe. I think we should be working with Europe. And I think Europe's now open to work with us to take stronger joint action against China. Look, I actually don't know that Trump's going to reduce the trade deficit. Depends on what his fiscal policy is. If the tax cuts turn out to be bigger than the tariffs,

And the spending cuts, you know, the Doge stuff is actually modest. I don't know what Congress, what the actual cuts are going to be. So I think it is quite possible that our fiscal deficit doesn't change, even with the tariffs, with the tariff revenue, in which case I would not expect a big change in the trade balance. I would expect lower imports and lower exports, but not a big change in the trade deficit. How do you get a change in the trade deficit?

Well, fiscal consolidation. I would think you'd need some tax revenue and justice spending cuts, but a 6.5% of GDP fiscal deficit would tend to raise your external deficit. The IMF standard coefficients would say that a 3% of GDP fiscal deficit is about a 1% increase in your trade deficit. So, you know, like...

A meaningful part of our trade deficit is arguably a direct reflection of our big fiscal deficit. Bringing our fiscal deficit down in a sustainable way to somewhere between 3% and 5% of GDP, to me, makes sense. I don't support doing that without symmetry about some tax increases. Our tax revenues are way too low. We need to spend more on defense. Aging populations require more services. We've got to be realistic about it. But yeah, we need a smaller fiscal deficit.

The dollar is too strong. The dollar is at all term, not all term, but it is close to its long-term highs. It's way above its 2000, 2001 levels. It is at a levels where US, where exports would be expected to continuously fall as a share of GDP. If you go to Europe,

Coffee is half the price it is here. Meals are cheaper. Wine's way cheaper. That's also tax less. And if we put heavy tariffs on wine, I sure as hell at the current level of the dollar, I'm going to get my wine on the beach in the south of France. I'm not dumb. I hope I'm not dumb. I recognize price differentials.

The U.S. has become quite expensive globally, and you see that in the low level of exports. You see that in the incentive to import. So the dollar has to adjust. How does the dollar adjust? Partially through tighter fiscal, less demand growth in the U.S., partially through changes in policies in our trading partners. China needs to do more fiscal stimulus. Germany finally is doing more fiscal stimulus. That's great. That would help.

And then the point where I actually think there's a big, easy win is on tax policy. Why are we running $150 billion trade deficit in pharmaceuticals? Why are we on a trajectory where this year we're going to run a close to $100 billion trade deficit on pharmaceuticals with just Ireland?

It is very clearly when you look at the deed, why do American pharmaceutical companies pay zero corporate income or they don't pay? They're still paying off the tax bill from Deem Repatriation in 2017. They aren't setting aside anything to pay current corporate income tax. They didn't set aside anything in '23, didn't set aside anything in '24. Top six from their own disclosure.

So we have a system where we're having a massive trade deficit in pharmaceuticals, where our companies are producing abroad to sell back to the US and they aren't paying tax in the US. Arnold Ventures has come out with some good proposals on this. I have some ideas that I presented to the Senate Finance Committee on this. This is a solvable problem with changes in the tax code. It's direct reflection of the 10.5% GILTI tax rate, which is below 21. So if you can move to GILTI, you move to GILTI.

So if we changed our tax code, I think we could get back a lot of the pharma. You look at other industries that people don't think about semiconductor equipment, manufacturing, applied materials reports, earning all of his profits abroad in Singapore, and they're producing high end components in Singapore to create the basis to pretend like they don't know any tax in the US. We can change this. So I think, you know, between fiscal adjustment,

in the US fiscal adjustments abroad, the dollar coming off the boil, changes in tax policy and yes, some industrial policy response to China. I like the CHIPS Act. I like the Inflation Reduction Act. I think we need to use some of the tools that China used to build up its industry

Because otherwise, you know, China's edge there is going to be permanent. I mean, private capital cannot compete easily against Chinese capital, which doesn't need any return. And we have to recognize that if we don't want global manufacturing to shift to China with the associated dependencies, we're going to need to adjust. So, I mean, I'm...

supportive of industrial policies that respond to China. I'm supportive of tariffs that are directed at China. I've explicitly argued in a paper with the Center for European Reform that Europe needs higher tariffs on China.

Where I break is on the trade war with Canada. Where I break is not recognizing the opportunity created by the shift in German fiscal policy and the evolving debate in Europe to try to build a broader coalition that limits all of our trade with China. Same vis-a-vis Mexico. Mexico shouldn't be importing so many Chinese cars. One third of all new car sales in Mexico are coming from China.

an integrated North American market, we shouldn't have differences in protection between the US and Mexico, where Mexico can import like a large share of its cars from China and then not feel employment effects because exporting so much to the US. So, you know, I break with Trump, but I'm not indifferent to the trade balance. So I guess I'm, at least I now like to think of myself as a moderate. And Brad, you said that you, I think you said that you like maybe a little bit of a weaker dollar to help with US exports.

I think every president and every treasury secretary says that they favor a strong dollar policy. Do you think the Trump administration and the current treasury secretary, Secretary Scott Besant, would like to see the dollar get a little bit weaker to improve the terms of trade, make US exports more competitive? Or do you think because going back a few months ago, tariffs are supposed to make the dollar stronger, right? So where do you think the administration wants the dollar? Higher or lower or the same?

Well, first of all, to be clear, Secretary Yellen did not have a strong dollar policy, although it was sometimes reported as a strong dollar policy. She had a policy whereby she wanted the dollar to reflect the strength of the U.S. economy, but she explicitly did not want other countries to intervene to strengthen the dollar.

There was a nuance there. Thank you for that. And, you know, that nuance was stronger at the beginning of the administration when it mattered less and less strong at the end of the administration. But I think she generally did not

go out and say I have a strong dollar policy and I thought that was a helpful move I think Secretary Bessette made a mistake by repeating the strong dollar policy partially because I'm not sure his boss agrees with it I mean his boss tweeted he wanted the Fed to lower rates which would typically lower the dollar his boss complained about yen weakness a couple of weeks ago which implies some

You know, if you don't want yen weakness, you're not entirely comfortable with dollar strength. But there's a deep contradiction between some of the arguments that Secretary Besson has made, some of the arguments that the incoming head of the Council of Economic Advisers have made, whereby a stronger dollar offsets the inflationary impact of the tariffs. And in that sense, you might say it's welcoming, lowers the hit to consumers because prices go up.

up or the dollar strengthens. So import prices go up by less and the desire to have more balanced trade, which does imply in conventional economics, some weakening of the dollar, you know, and you can want a weakening of the dollar from its current level without wanting the dollar to disappear from the global stage.

We're at extremes. Yen 150 is an incredibly weak yen. In real terms, the yen is at its levels of the 1970s. Korean won 1400. That's global financial crisis. That's Korea's 97 crisis levels for the won. Taiwan dollar.

below where it was during the Asian financial crisis. Not gone up even as TSMC has become one of the most globally significant companies, even as Taiwan's trade surplus has soared. Chinese Yuan at 7.225. It's a really weak Yuan. The Yuan was up to 6.2. This is at the weekend of its now close to 18-year band.

You know, Euro 110 is not Euro 1, but it's still a pretty weak Euro, especially when you take into account that inflation has been lower in Europe than in the U.S.

So I think you can want a balanced value of the dollar, that you're not at the extreme levels of strength without any desire or expectation that a dollar adjustment would lead the dollar to cease to be an important global currency. I think those two debates are separate. And I sometimes worry that parts of the administration conflate them. Brad, thank you so much. You've been really generous with your time and insights. You've just got an extraordinarily...

a sophisticated way of thinking about this. You've got the data. I really recommend people checking, you're following your work on Twitter. You post regularly. You post these great threads at Brad underscore Setzer on X. And then your work at the Council of Foreign Relations is cfr.org slash expert slash Brad dash W dash Setzer. A reminder for everyone watching, they can find the show on YouTube. Please like and subscribe. It helps the channel. Also on Apple Podcasts and Spotify, please leave a review. It really helps the show. Thank you everyone for watching. Until

Until next time, thanks for watching. Remember to check out vanEck.com/NLRJack to learn more about the VanEck Uranium and Nuclear ETF. Thank you. Just close this door.